Contract Law Basics

Capacity and Consideration

• Persons may not have legal capacity to enter contracts
• Mutual consideration is an exchange of value
• Caveat emptor - let the buyer beware

Valid Contract

• A valid contract is a deliberate agreement between at least two competent parties, supported by mutual consideration, to do some legal act voluntarily

Legality

• For a contract to be valid and enforceable, it must be legal
• The consideration and subject of the contract must also be legal

Contrary to Statute

• A contract that is contrary to the criminal code is illegal
• Contracts may be illegal under other acts such as the Competition Act or Workers Compensation Legislation

Public 'Good' or 'Policy'

• Public policy prevents the courts from enforcing rights that are contrary to the general interests of the public
• Public policy can also affect legal interest rates for private lenders

Restraint of Trade: Categories

• Contracts in restraint of trade fall into 3 categories:
  • Contrary to the Competition Act
  • Agreements between business sellers and purchasers restricting the vendor from engaging in similar business in competition
  • Agreements between employees and employers restricting the employee's right to compete with the employer

Restraint of Trade: Covenants

• Contracts in restraint of trade create restrictive covenants
• Restrictive covenants are considered void on first appearance (prima facie)

Un-licenced Work

• Contracts between unlicensed tradespersons and professionals and a contracting party may be illegal. This applies to professions like engineering, architectural, electrical, and more

Un-permitted Work

• Construction work without a permit is illegal or un-permitted
• Be sure to check local city licensing and permitting requirements

Voluntary Action and Consent

• In order to create a valid contract, one must give genuine consent - which means acting voluntarily
• Vitiating factors can affect a contract's validity and include:
  • Misrepresentation
  • Undue influence
  • Duress
  • Mistake

Misrepresentation: Material Fact

• A material fact leads to or brings about a contract
• For example:
  • The color of a car may be important to a buyer, while type of stereo may not be.

Misrepresentation: Categories

• Three different categories of misrepresentation exist:
  • Innocent
  • Fraudulent
  • Negligent

Innocent Misrepresentation: Definition

• A false statement of a material fact made by a party that honestly believed the fact to be true

Innocent Misrepresentation: Example

• A seller mistakenly believes a parcel of land is zoned for high rise buildings, when in fact it is not. This is an innocent misrepresentation.

Innocent Misrepresentation: Remedy

• Contract rescission is the revocation of a contract
• Rescission restores the parties to their pre-contract state

Fraudulent Misrepresentation: Definition

• A false statement of a material fact made with the intent to deceive.

Fraudulent Misrepresentation: Example

• Selling a diamond ring that is actually crystal.

Fraudulent Misrepresentation: Remedies

• Contract rescission if possible
• Sue for damages
• May include punitive damages due to fraudulent nature of the misrepresentation
• May also be considered a tort of deceit

Negligent Misrepresentation: Definition

• A false statement of a material fact made due to a person's negligence. Non-disclosure may also be considered negligent misrepresentation.

Negligent Misrepresentation: Example

• Esso provides franchise information that is completely inaccurate.

Negligent Misrepresentation: Remedies

• Contract rescission if possible
• Sue for damages
• May include punitive damages

Undue Influence: Power Relationships

• In law, certain "power relationships" exist and can impact voluntary action and consent
• Positions of elevated status, higher education, family ties, medical professionals, and others possessing undue influence may affect a person's ability to consent to a contract

Duress: Definition

• Duress occurs when unlawful pressure is used to compel someone to agree. This pressure can be violence or threats of violence towards the person or their family.

Duress: Action

• One cannot be acting voluntarily when under threat of violence.
• It is important to repudiate (reject) the contract quickly.

Mistake: Definition

• Mistake is defined as:
  • An erroneous opinion as to the identity or existence of the subject matter or some other important term of a contract

Mistake of Fact: Definition

• Mistake as to the existence of the subject matter of a contract or the identity of a party.

Mistake of Fact: Subject Matter

• Example: A boat is sold when it no longer exists, such as in the case of a fire destroying the vessel.

Mistake of Fact: Identity of a Party

• Parties to a contract cannot be mistaken as to the identity of the party with which they are contracting.

Mistake: Unilateral vs Mutual

• Unilateral Mistake: One party is mistaken. This can resemble misrepresentation.
• Mutual Mistake: Both parties are mistaken.
  • Rectification may be possible.

An Obvious 'Mistake'

• If a mistake is obvious, a potential contract may be void
• If a mistake is obvious on the face of a quote, for example.

Unilateral Negligent Mistake: Caveat Emptor

• Caveat Emptor (let the buyer beware) applies where one party makes an error with regard to the adequacy of consideration in a contract.